Canadian subprime lenders race to shore up confidence as deposits withdrawn

Canada's Finance Minister Bill Morneau delivers the federal budget in the House of Commons on Parliament Hill in Ottawa, Ontario, Canada, March 22, 2017. REUTERS/Chris Wattie

By John Tilak

TORONTO (Reuters) – Canadian subprime mortgage lenders raced to shore up confidence in their model on Monday as depositors pulled more money out of Home Capital Group Inc’s &lt;HCG.TO&gt; high-interest savings accounts while another lender lined up C$2 billion in emergency funding.

Canada’s No. 2 listed alternative lender Equitable Group &lt;EQB.TO&gt; said it has taken steps to reinforce its liquidity position on Monday after it experienced a quickened pace of withdrawals late last week.

Meanwhile, Home Capital, Canada’s biggest alternative lender, said it expected to draw down half of a C$2 billion ($1.46 billion) credit line that it secured last week, as it seeks to offset the impact of a steep fall in high-interest savings accounts (HISA) deposits.

Withdrawals from Home Capital’s HISA accelerated last week after its founder joined the ranks of recent executive exits tied to a securities regulator probe. The regulator has accused the company of making “materially misleading statements” to investors.

The troubles at Home Capital, which provides subprime mortgage loans and has seen a 73-percent decline in HISA deposits since March 30, has raised fears it may be the first sign of a crack in Canada’s red-hot housing market, which some have called a bubble.

In Toronto alone, house prices surged 33 percent in March from a year ago, prompting authorities to take a series of measures, including a 15-percent foreign buyers’ tax, last month.

Equitable said it got the C$2.0 billion funding facility from a syndicate of Canadian banks on Monday..

“We are confident in the fundamentals of our business and our funding model, but owing to these recent events we have taken steps to reinforce our liquidity position,” it said in a statement.

Equitable shares rose 28.5 percent at C$46.89 in late afternoon trading on Monday.

Equitable said it was also “focussed on extending the term of our GIC portfolio,” which would entail extending the maturity of any new guaranteed investment certificates, or GICs.

Home Capital’s shares slumped as much as 29 percent before regaining some ground on Monday and were down 13.2 percent at C$6.98.

The lender, which has hired bankers to help it secure additional funding and assess options, has seen its shares plummet since a securities regulator last month alleged its top executives hid mortgage broker fraud from investors.

“It’s a blow for the nonbanking mortgage lending sector,” said David Cockfield, managing director and portfolio manager at Northland Wealth Management. “Anything that diminishes the scope of the mortgage market will leave people high and dry. It has an economic impact.”

Finance Minister Bill Morneau and the national banking regulator are both monitoring Home Capital’s situation closely, the pair said. Morneau said he has been in touch with the heads of federal financial regulatory agencies to discuss it.

Morneau said “the system is working as it should where institutions facing challenges find market-based solutions,” referring to Home Capital’s ability to obtain a credit line.

Last Thursday, the Healthcare of Ontario Pension Plan agreed to lead a consortium providing a C$2 billion credit line to its Home Trust unit.

The Ontario’s Public Service Employees union said it opposed using pension funds to finance Home Capital and wants stricter guidelines governing pension funds’ investments.

“It’s workers’ money going to finance a finance company that sells mortgages to people who maybe can’t afford the mortgages,” said Warren Thomas, president of the union. “I think it’s a risky, inappropriate investment … I just don’t think we should be in the business of financing banks.”

FILE PHOTO: A sign shows the logos of Home Capital Group’s subsidiaries Home Trust and Oaken Financial in front of their headquarters in an office tower in the financial district of Toronto, Ontario, Canada April 26, 2017. REUTERS/Chris Helgren/File Photo

MUTED IMPACT?

However, Home Capital has low delinquency rates and it services less than 1 percent of the Canadian housing market, Karl Schamotta, director of global product and market strategy at Cambridge Global Payments, said in a briefing note.

“In contrast with the meltdown that triggered the global financial crisis almost a decade ago, Home Capital’s problems do not relate to underperformance in the underlying loan portfolio – and are likely too small to generate real systemic risk.”

Depositors have been withdrawing more cash from savings accounts that help fund Home Capital’s mortgage book.

The company said the balance in its high-interest savings accounts (HISAs) was expected to slump to about C$391 million on Monday, from C$521 million on Friday. The balance was C$1.4 billion a week ago.

“While the pace of withdrawals does appear to be slowing, funding is expected to remain a material constraint,” Raymond James analysts wrote in a client note.

Home Capital said Friday about C$290 million had been withdrawn from its HISAs the previous day, compared to C$472 million on Wednesday.

Total deposits in Home Capital’s less-liquid Guaranteed Investment Certificates stood at C$12.86 billion as of April 28, marginally lower than the C$12.97 billion, as of April 26.

The alternative lender is expected to report first-quarter results later this week.

(Reporting by Swetha Gopinath and Arathy S Nair in Bengaluru, John Tilak and Solarina Ho in Toronto; Additional reporting by Anna Mehler Paperny in Toronto; Editing by Sai Sachin Ravikumar and Nick Zieminski)